IHS Global: German Ifo business climate index displays surprise improvement driven by retail and construction expectations in September
Frankfurt/Main (24.9.15) – In September, the headline Ifo business climate index reflecting conditions in industry, construction, and wholesale and retail trade unexpectedly increased slightly further from 108.4 (revised up from 108.3) to 108.5. This almost matches the April/May interim high of 108.6. The overall index level of 108.5 also compares favourably to a long-term average of 101.5 and the October 2014 low of 103.6, and it is relatively close to the latest cyclical high of 110.9 observed in January/February 2014.
The data show that German businesses were unsettled only temporarily and modestly by events surrounding Greece in June (-1.1 points). By contrast, the previous downward correction – linked to geopolitical concerns (Ukraine/Russia, IS threat in Iraq and Syria) and to emerging market problems caused by the US Fed’s shift towards less expansionary monetary policy – had not only lasted much longer (March-October 2014) but also been more pronounced (cumulative drop by 7.2 points). For comparison, the historic extremes of the headline Ifo business climate index are a low of 83.6 in March 2009 in the wake of the Lehman collapse and an all-time peak of 114.4 in December 2010. The massive oil price decline and extensive weakening of the euro since mid-2014 remain important supportive factors for German companies. Ifo index developments since November 2014 continue to convey a stronger impression of the German economy than the PMI data, let alone the ZEW survey.
Most surprising about the September outcome was that not current conditions but expectations were responsible for the overall improvement this time, which runs counter to a common perception of worsening global growth prospects (notably in China) and mounting refugee related problems. Admittedly, the Volkswagen disaster with its potential negative repercussions on the international reputation of German industry emerged too late to be reflected in the September Ifo survey yet. In any case, the Ifo survey component reflecting six-month expectations rebounded from 102.2 to 103.3, newly approaching the interim high of 103.8 seen in March and clearly exceeding its long-term average of 100.3. The expectations sub-index had deteriorated during 2014 from a 35-month high of 108.2 in January to 99.2 in October 2014 before recouping half of this decline until March. It should be kept in mind that the Lehman related all-time low had been massively lower at 78.6 in December 2008. Meanwhile, the current conditions component broadly unwound the previous month’s gain, slipping from a 16-month high of 114.8 to 114.0. This nonetheless stays close to the March 2014 two-year high of 115.5. Indeed, the underlying robustness of current conditions is underlined by the fact that the interim April-October 2014 downward correction to eventually 108.3 never undercut the interim trough of 106.7 in December 2012, not to speak of the long-term average of currently 102.9.
Meanwhile, today’s separate Ifo survey release about the climate in the service sector – a series available since January 2005 – revealed a slight downward correction from the previous month’s all-time high. The headline services index slipped from 30.7 (revised up from 30.6) to 30.2. In contrast to the split shown by the main Ifo business climate survey described above, the correction was driven by the expectations component, which declined from 20.2 to 18.8 (long-term average is 10.5). By contrast, current conditions improved slightly further from 41.9 to yet another all-time high of 42.3. This compares to a long-term average of 22.3. Returning to overall service-sector confidence, there had been a sideways tendency between mid-2012 and November 2013 followed by a break-out to the upside around the turn of the year 2013/14, and then another sideways trend at a new elevated level for a year – which has now been left behind for yet higher territory in recent months. During more than ten years of history of this service sector series, expectations have fluctuated between -25.0 (December 2008) and 26.0 (November 2010), and current conditions between -12.2 (May 2009) and 42.3 (September 2015).
Meanwhile, the breakdown of the main Ifo survey by sector, relating to goods production and trade, reveals that the chief elements responsible for the slight further increase in September were the retail trade and construction sectors. Wholesale trade improved only slightly and manufacturing even deteriorated modestly. In the case of retail and construction, both expectations and current conditions improved, in part markedly so. The driving sub-components were construction expectations and current conditions in retail trade. The latter ties in with persistently favourable macroeconomic conditions for consumers and the new all-time high of the current conditions component of the Ifo service-sector survey this month. The construction sector climate has now reached the highest level since January 2014, a level that in any case exceeds by far what had been observed during a near-20-year period between 1992 and 2010. In the manufacturing sector, worsening current conditions were partly offset by a modest rebound in expectations. The Ifo report once did not mention manufacturers’ export prospects, but it did confirm a rebound in the number of companies planning to expand production. Finally, the slight improvement in the wholesale sector was driven by current conditions again after a breather in August, whereas wholesaler expectations slipped marginally.
Overall, the September Ifo business climate report once again underlines the strength in underlying domestic demand, specifically of private consumption and construction, which is making the economy quite resilient to any dampening influences from abroad. The latter refers to developments in many emerging markets – most notably China – at present, although it should be noted that average developments in the Eurozone are still following a tendency towards slightly accelerating economic growth, leaving behind the fragility of 2009-2013. The overall picture for Germany’s exports thus remains solid anyway, also keeping in mind the ongoing support from fairly low oil prices, a weak euro, and extremely low interest rates. The economic difficulties in major emerging markets, the refugee problem, and the implications of the Volkswagen scandal will thus restrain achievable German growth momentum but not derail the upswing as such. German GDP growth is expected to fluctuate around the 2% mark in annualized terms during the coming quarters.
The latest IHS forecast for annual average GDP growth in 2015 is 1.7%, up from 1.6% in 2014. This refers to calendar-adjusted data – the 2015 forecast in non-adjusted terms is in fact even 1.9%. German consumer demand has been growing at a pace of around 0.5% q/q since mid-2014 and should maintain this momentum during the second half of 2015 despite the setback to only 0.2% q/q in Q2, which we would regard as an outlier. High nominal and – given near-zero inflation – real wage growth, ongoing employment gains, and extremely low interest rates that discourage saving are all factors bolstering consumer spending. For 2016, our current GDP growth forecast is 2.1%, which translates to 2.2% in non-adjusted terms.
Stay In Touch